Sweden's Goals Fuel Saab's Acquisitions

Australian Shipyard Is Another Possible Target

Apr. 19, 2014 - 02:19PM
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Eyes on Sub Market: The Swedish diesel-powered attack submarine Götland and others of its class were built in Sweden by Kockums, now part of ThyssenKrupp Marine Systems. Stockholm supports Swedish company Saab's move to buy the former Kockums from its German owners. (PH2 Patricia R. Totemeier/US Navy)

HELSINKI — The Swedish government’s drive to rebuild core national defense capacities is pivotal to Saab’s ambitions to develop a competitive submarine branch and become a major global player in this segment, government and company insiders say.

Saab is reportedly close to agreeing to a takeover price with ThyssenKrupp for shipyards operated by the German group’s subsidiary, ThyssenKrupp Marine Systems (TKMS), in Malmö, Karlskrona and Muskö, Sweden.

The acquisition of TKMS’ yards is fundamental to Saab’s quest to acquire the design and construction infrastructure it needs to secure state contracts ahead of taking over the A26 Next Generation Submarine and Götland-class fleet modernization programs for a cost of $3.5 billion.

Capacity acquisition will also be a vital component to Saab’s pursuit of an international partner, said Peter Hultqvist, chairman of the Swedish parliament’s Standing Committee on Defense (SCD).

“The wheels have turned,” Hultqvist said. “The government, possibly in response to Russia’s aggression in Crimea and the Ukraine, has decided that a strong industrial defense capacity that is Swedish-controlled will be the cornerstone that underpins defense policy and future capability.”

The government’s view is that a Swedish-controlled submarine capacity is the best means to release TKMS’ (formerly Kockums) dormant potential to produce world-class subs and surface naval vessels. It will also enhance Sweden’s ability to pursue international contracts, such as Australia’s proposed $37.5 billion Future Submarine program, Hultqvist said.

Anders Carp, senior vice president and head of Saab’s Nordic and Baltic market area, said that the company is looking to increase its presence in Australia and has not ruled out bidding for the Australian sub-builder ASC.

“We are impressed by the company [ASC]; they have built up a very good business there, both with submarines and the Air Warfare Destroyer. But we need to look into that when it happens,” said Carp, who also is in charge of Saab’s corporate responsibility for government affairs.

The Saab-Australian connection had earlier been flagged by Lena Erixon, the CEO of FMV, Sweden’s defense materials procurement agency.

“It is possible that the work may also be shared with Australia and Poland. In Australia, there is considerable interest in a partnership regarding submarines,” Erixon said.

The Royal Australian Navy’s (RAN) existing fleet of six Collins-class submarines are based on a Kockums design. This fact, coupled with the state-held ASC’s service and maintenance contracts with the RAN, has added a new dynamic to the prospect of a future Saab bid for ASC, which continues to be the subject of sale rumors.

ASC officials have not commented.

Australia has a requirement for 12 large conventionally powered submarines under Project Sea 1000 (Future Submarine). The choice has been narrowed to either an evolution of the Collins boat or a new design.

Saab, says Carp, is interested in both options.

“Sea 1000 is one of the largest and most interesting programs and it’s Australia’s biggest program ever,” Carp said. “Being in the defense industry, you’d be kind of stupid not to be interested in it.”

Saab sees synergies between Sweden’s A26 program and Australia’s Sea 1000 Future Submarine project, and is examining a possible partnership with ASC on new submarines and the upgrade of existing boats.

Another possible fit is Sweden’s planned midlife upgrade on its three A19 Götland-class submarines and the Australian Service Life Extension Program (SLEP) for its six Collins-class boats in the same time frame.

Saab and ASC constitute natural partners, Carp said.

Defense cooperation, including collaboration on submarine capability, was discussed when FMV officials visited Australia in recent months. Japan is also exploring cooperation with Australia.

Troubled Relationship

The emergence of Saab as a global player in submarine production would not be possible unless the company had the “wholehearted support” of the Swedish Cabinet, said an insider at FMV.

“Soon after ThyssenKrupp bought Kockums in 2005, there was a sense that the state had missed the opportunity to safeguard submarine building in Sweden,” the FMV insider said. “These fears intensified when Kockums’ project bidding role was removed to Germany at a time when it was working on bids for the Australian program as well as the prospective $4 billion Ula-class replacement program in Norway.”

The government’s unease over ThyssenKrupp’s ownership of Kockums increased when the company name was changed to ThyssenKrupp Marine Systems in 2013 and the German parent signaled its intent to move large-scale submarine production out of Sweden, said Allan Widman, the Liberal Party’s spokesman on defense and a member of the Standing Committee on Defense.

“ThyssenKrupp proposed a massive reorganization under which its yards in Sweden would build mini-subs of under 1,000 tons,” Widman said. “The A26 has a 1,900 tonnage. The alarm bells really began to ring at FMV and in government when ThyssenKrupp refused to either commit to building the A26 in Sweden or deliver a fixed project price.” said Widman.

ThyssenKrupp’s original interest in acquiring Kockums was to “gain control” over a competitor on the submarine market, one German naval analyst said.

“Now there will be a competitor on the market again, which is not under control,” he said, adding that the Swedish naval sites being pursued by Saab do not “possess the same level of experience and knowledge as ThyssenKrupp’s facilities in Germany. Saab will have to build up much of the technology again.”

The collapse in the relationship between ThyssenKrupp and Sweden’s Ministry of Defense culminated with FMV, under armed escort, turning up at TKMS’ Malmö headquarters on April 8 to “secure” classified documents, intellectual property and blueprints related to the A26 and its stealth Stirling air-independent propulsion engine.

“The raid incident is very strange, very unusual,” said Gunnar Hult, a defense-political analyst at Sweden’s National Defense College. “It has long been thought in Sweden that ThyssenKrupp acquired Kockums to remove a competitor. What is somewhat surprising now is that ThyssenKrupp decided to negotiate with Saab, who may become a competitor. I wouldn’t be surprised if there are lots of calls between the Swedish and German governments about such a strategic matter.”

'Not a Good European Solution'

Saab’s ability to do a deal with ThyssenKrupp would inject new life into a Kockums in decline, said Luc Viellard, a director of strategic studies and solutions at the French consulting firm Compagnie Européenne Intelligence Stratégique.

“Saab would add one more competitor to the European and the world market,” said Viellard, who noted that a Saab acquisition of Kockums could pose a threat, or an opportunity, for French submarine builder DCNS.

However, Christina Balis, the head of European operations at consulting firm Avascent, said Saab’s acquisitive intent “may be a reasonable Swedish solution, but it is not a good European solution.” A Saab takeover, she observed, would only further delay much-needed industry consolidation across the European naval sector.

Other European countries, said Balis, could use the Saab-Kockums case to justify a similar national approach toward the creation of larger industrial conglomerates, based on a vertical integration of domestic capabilities.

Similar developments, Balis said, are underway in France and Spain, with Paris favoring Thales to increase its 35 percent stake in DCNS, while Madrid is pushing for a consolidation of shipbuilder Navantia and technology company Indra.

“Vertical makes very little business sense. There are six submarine-producing nations in Western Europe, which is unsustainable,” Balis said.

The political aim may be to protect jobs, but without sustained demand, both long-term employment and capabilities are put at risk, she said.

Submarine production in Europe is centered on companies based in France, Germany, Britain, Italy, Spain and Sweden

Saab’s takeover talks with ThyssenKrupp have also raised eyebrows in Italy.

“It seems strange — not from an industrial point of view, since Saab has produced naval combat systems, but from a national point of view,” an Italian defense industry analyst said. “There has been an attempt to consolidate the defense sector in Europe, but that requires a consolidation of demand. What we are seeing here goes against that trend.”

Italy’s Fincantieri has built submarines for Italy at its yards in Italy in cooperation with ThyssenKrupp, using German intellectual property while producing Italian variants on models. ■

Tom Kington in Rome, Albrecht Müller in Bonn, Nigel Pittaway in Melbourne, Australia, and Pierre Tran in Paris contributed to this report.